No IGST/ Service Tax on Ocean Freight under CIF Contracts – Importer Not ‘Recipient’ and Levy Violates Composite Supply Principle

The Hon’ble Bombay High Court in the case of Firmenich Aromatics Production India Pvt. Ltd. Versus Union of India & Ors. - 2026 (3) TMI 399 - BOMBAY HIGH COURT held that importers under CIF contracts are not liable to pay IGST/service tax on ocean freight under reverse charge, as they are neither recipient of such services and such levy violates the concept of composite supply under GST law.

Facts:

Firmenich Aromatics Production India Pvt. Ltd. (“the Petitioner”) is an importer of goods under CIF contracts and challenged the levy of Service Tax/IGST on ocean freight imposed through various provisions of the Finance Act, 1994, IGST Act, 2017, and related notifications and circulars.

The Union of India & Ors. (“the Respondent”) issued communications and a show cause notice seeking to levy Service Tax/IGST on ocean freight under reverse charge mechanism on the Petitioner.

The Petitioner contended that the levy of tax on ocean freight services provided by a person located outside India to another person outside India is extra-territorial, lacks sufficient territorial nexus, violates Article 245 of the Constitution, and is ultra vires the charging provisions. It was further contended that the Petitioner is not the recipient of such services under CIF contracts.

The Respondent contended that the issue is covered by judicial precedents and sought to justify the levy under reverse charge mechanism and statutory notifications.

The Petitioner, aggrieved by the show cause notice dated May 14, 2019 and related communications, approached the Hon’ble High Court by way of a writ petition under Article 226 of the Constitution seeking quashing of the same.

Issue:

Whether importers under CIF contracts are liable to pay IGST/Service Tax on ocean freight under reverse charge mechanism for services provided by foreign shipping lines to foreign exporters?

Held:

The Hon’ble Bombay High Court in Firmenich Aromatics Production India Pvt. Ltd. Versus Union of India & Ors. - 2026 (3) TMI 399 - BOMBAY HIGH COURTheld as under:

• Noted that, in CIF contracts, the importer is neither the service provider nor the recipient of ocean freight services, as the contract for transportation is between foreign exporter and shipping line.
• Observed that, levy on importers amounts to taxing a third party, which is beyond the charging provisions of the Finance Act, 1994.
• Noted that, reverse charge mechanism permits recovery only from the recipient of service and not from a third party.
• Observed that, levy of IGST on ocean freight violates Section 8 of the CGST Act, as the importer already pays IGST on composite supply including freight and insurance and that the levy lacks territorial nexus and is extra-territorial in nature.
• Held that, the impugned notifications and levy are ultra vires statutory provisions and unconstitutional.
• Directed that, the show cause notice dated May 14, 2019 and related communications are quashed and that the Petitioner is entitled to refund of amounts paid, subject to filing refund application and principles of unjust enrichment.

Our Comments:

The judgment follows the ratio laid down in MESSRS SAL STEEL LTD. & 1 Other (S) Versus UNION OF INDIA - 2019 (9) TMI 1315 - GUJARAT HIGH COURTwhere the Gujarat High Court held that importers in CIF contracts are neither recipients nor liable under reverse charge, as the statutory scheme permits taxation only of service provider or recipient. The Court reasoned that imposing liability on a third party violates Sections 65B(44), 68, and 94 of the Finance Act, 1994, and lacks machinery provisions for valuation.

The Bombay High Court also relied on Union of India & Anr. Versus M/s Mohit Minerals Pvt. Ltd. Through Director - 2022 (5) TMI 968 - Supreme Court, wherein the Supreme Court held that levy of IGST on ocean freight under reverse charge is violative of the concept of composite supply under Sections 2(30) and 8 of the CGST Act, as the importer already pays IGST on the composite supply of goods inclusive of freight.

The present judgment aligns consistently with these precedents and reinforces the principle that tax cannot be imposed on a person who is neither service provider nor recipient, and that composite supply doctrine prevents artificial splitting of transactions for taxation.

Relevant Provisions:

Section 65B(44) of the Finance Act, 1994

“(44) 'service' means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include—

(a) an activity which constitutes merely,– (i) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or (ii) a transaction in money or actionable claim;

(b) a provision of service by an employee to the employer in the course of or in relation to his employment;

(c) fees taken in any Court or tribunal established under any law for the time being in force.

Explanation 1.— For the removal of doubts, it is hereby declared that nothing contained in this clause shall apply to,–

(A) the functions performed by the Members of Parliament, Members of State Legislative, Members of Panchayats, Members of Municipalities and Members of other local authorities who receive any consideration in performing the functions of that office as such member; or

(B) the duties performed by any person who holds any post in pursuance of the provisions of the Constitution in that capacity; or

(C) the duties performed by any person as a Chairperson or a Member or a Director in a body established by the Central Government or State Governments or local authority and who is not deemed as an employee before the commencement of this section.

Explanation 2.–– For the purposes of this Chapter,—

(a) an unincorporated association or a body of persons, as the case may be, and a member thereof shall be treated as distinct persons;

(b) an establishment of a person in the taxable territory and any of his other establishment in a non-taxable territory shall be treated as establishments of distinct persons.

Explanation 3.— A person carrying on a business through a branch or agency or representational office in any territory shall be treated as having an establishment in that territory;”

Section 68 of the Finance Act, 1994

“68. Payment of service tax.-

(1) Every person providing taxable service to any person shall pay service tax at the rate specified in section 66 in such manner and within such period as may be prescribed.

(2) Notwithstanding anything contained in sub-section (1), in respect of such taxable service as may be notified by the Central Government in the Official Gazette, the service tax thereon shall be paid by such person and in such manner as may be prescribed at the rate specified in section 66 and all the provisions of this chapter shall apply to such person as if he is the person liable for paying the service tax in relation to such service.

Provided that the Central Government may notify the service and the extent of service tax which shall be payable by such person and the provisions of this Chapter shall apply to such person to the extent so specified and the remaining part of the service tax shall be paid by the service provider.”

Section 2(30) of the CGST Act, 2017

“2. Definitions.-

(30) 'composite supply' means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply;

Illustration.- Where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is a composite supply and supply of goods is a principal supply”

Section 8 of the CGST Act, 2017

“8. Tax liability on composite and mixed supplies.-

The tax liability on a composite or a mixed supply shall be determined in the following manner, namely:-

(a) a composite supply comprising two or more supplies, one of which is a principal supply, shall be treated as a supply of such principal supply; and

(b) a mixed supply comprising two or more supplies shall be treated as a supply of that particular supply which attracts the highest rate of tax.”

 (Author can be reached at [email protected])